You can walk down just about any street in any city and pass many different businesses. Some of these businesses are owned by major corporations, some by small businesses and others by individual’s or families. For a large portion of people those businesses being there are a fact of life. They expect them to be there and do not even give their existence a second thought. Even when they are closed down, it is just thought to be a part of the way things work.
For often a smaller group of people when they walk past these stores, they know what has gone into getting those stores there, some own these stores, some own similar stores, and some are the people in the corporations that own the stores. Then there is a smaller group, a group that used to own these stores or stores like them. Some of this group sold their stores and benefited from it, while others sold the store to just break even, or closed down because they could not afford to continue on.
While there are people going by these shops in all different capacities, there are probably few of them that are thinking how does each of these stores survive as a business. How does a store actually generate a sufficient profit to pay a lease, pay staff, pay the bills, and generate a profit to make it worth the investment of the owner. This is a question that i tend to ask myself a lot. Not because i am an owner of one of these stores. But because i like to analyze why, of how businesses manage to survive based on the minimal knowledge you can usually gain from looking at a business.
I am not so interested in the idea of how a large chain store makes a profit, as this is often rather easy to deduct. Based on the ability to place themselves as a draw card tenant to a shopping center, they achieve relatively low lease prices for the space. Then you expect that being a chain store they do have buying power which often means much better wholesale prices then other smaller stores. Finally the concept of pushing a lot of small sales through is one that works for this type of store, purely because of the scale they work on.
What i am interested in though is actually trying to work out how and more so why some of the small businesses can manage to survive. The type of costs that are associated with the business that they are running just seem to be beyond the ability of such a business to sustain over the long term. This is one of the reasons that i am very adamant in my preference for No Fixed Office, you can eliminate so many of these costs that are in my opinion a hindrance to a potential profitable business.
What you often tend to find is that the costs that these business incur are not what you really may imagine. Just an example, in a smaller area outside a major city, there is an area with a shopping center and shops along the main street. To get a store in the shopping center at around 50sqm, will cost a business over $40,000 for the lease. The same store in the front of the center on the main street, comes in at over $50,000 a year.
Unfortunately this does not appear as the end of the expenses for a business, Staff (just one person for 30hrs per week, could easily exceed $40,000 per year including all costs of staff). Utilities, or sometimes included as outgoings in your less, can vary from $30-$60 or more per sqm per year (or for the above 50sqm example $1,500 – $3,000). Then there is an ever growing list of other things, telephone, stationary, cleaning, and the list goes on. It is not hard to imagine the total exceeding $100,000 a year in costs for even the smallest of stores.
The most difficult part to work with though i believe comes from how these businesses derive their profit. It is the same as just about any other business a little bit at a time. Not only are these business at one disadvantage by needing to hold sufficient stock to make a sale. They also only sell a little bit at a time. If you were to consider an average sale of around $40.00, even at the best case scenario of maybe a 50% average profit margin, this equates to an average profit of $20.00 per sale. So how do you get from $20.00 per sale to $100,000 in expenses to cover, with over 5,000 sales. Or a little under 100 sales per week.
What i find interesting in some cases is that some of these stores may not even get this many customers walk through the doors per week. Then there are the stores that have a vast majority of products that sell for less then $20.00 alone. So it will take many more sales just to reach these levels.
Even though i have this preference for no fixed office, i can understand there is a number of businesses people traditionally see as needing a fixed location. Especially in retail sales many of the products that are sold rely on a store that potential customers can visit. However the way things seem to have traveled, it is almost a requirement for some stores to seek prime positions which cost them so much more then they really need to be paying in leases. If the owners of these stores saw the potential of a slightly less prominent location, and the potential that the extra money saved could provide in ability to market, and extra profit.
This is of course not to say that these business owners should not also consider the potential difference in sales. However often the consideration is fairly black and white, and is only tainted from this straight forward one or the other by information that does not necessarily actually count. For example is it worth paying three times the lease price to get a prime main road location over a position in an arcade, if at best you may only produce double the sales.
This is one of the fears that i dread seeing the most is people who are working their guts out to pay a lease, and staff and rent to operate a business that was suppose to be a fun and freeing experience for them. Which actually turns out to become one of the most challenging and difficult experiences that they have ever had to undertake. While I can see the need for many of these businesses, they are really almost nothing more then a fairly low paying job for their owner. They are working for an ideal which is almost not something that they are able to actually achieve on this path.
I do implore you to consider this, which i have shared today if you are planning to start a business which will require not just long hours, but the type of financial commitment, that i foresee you would need to put yourself in a prime location. If you can create a business alternatively which provides a product people want, that you can provide, but most importantly that you can provide from anywhere, either electronically, by delivery or by some means which eliminates the need for the excessive costs of placing your business somewhere you hope will provide what it is worth.